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Article

The Use of ABX Derivatives in Credit Crisis Litigation

Ethan Cohen-Cole and Faten Sabry
The Journal of Structured Finance Winter 2014, 19 (4) 22-34; DOI: https://doi.org/10.3905/jsf.2014.19.4.022
Ethan Cohen-Cole
is a managing director at Econ One Research Inc. in Berkeley, CA.
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  • For correspondence: ecohencole@gmail.com
Faten Sabry
is a senior vice president at National Economic Research Associates Economic Consulting in New York, NY.
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  • For correspondence: faten.sabry@nera.com
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Abstract

In this article, we focus on the ABX indices, explain their economic functions, and explore how these indices are currently used in litigation related to the credit crisis. The ABX indices reflect important information for market participants, but a full understanding of the economics behind the indices is critical. Simple arguments and approaches about how the ABX indices should be used are bound to be flawed. The indices are meant as a publicly available measure of investors’ perception of the subprime market and their expectations about the expected defaults of the underlying mortgage collateral. But as the crisis unfolded and liquidity declined and even disappeared at various points, from not just the subprime market but all markets, the levels of the ABX indices reflected not just the increased default risk on the underlying referenced mortgages but also the increased perception of risk, lack of liquidity, increased uncertainty, and significant changes in the macroeconomic environment. It is critical to conduct careful analysis of the components of these ABX derivatives to properly use them as inputs in valuation.

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The Journal of Structured Finance: 19 (4)
The Journal of Structured Finance
Vol. 19, Issue 4
Winter 2014
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The Use of ABX Derivatives in Credit Crisis Litigation
Ethan Cohen-Cole, Faten Sabry
The Journal of Structured Finance Jan 2014, 19 (4) 22-34; DOI: 10.3905/jsf.2014.19.4.022

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The Use of ABX Derivatives in Credit Crisis Litigation
Ethan Cohen-Cole, Faten Sabry
The Journal of Structured Finance Jan 2014, 19 (4) 22-34; DOI: 10.3905/jsf.2014.19.4.022
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  • Article
    • Abstract
    • OVERVIEW OF THE NONAGENCY MORTGAGE MARKET, ISSUANCE VOLUME, AND LOAN CHARACTERISTICS
    • ALLEGATIONS IN THE CREDIT CRISIS CASES RELATED TO ABX INDICES
    • ABX REFERENCES IN DECISIONS AND OPINIONS
    • WHAT ABX INDICES CAN AND CANNOT TELL US
    • ADDITIONAL THOUGHTS
    • ENDNOTES
    • REFERENCES
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